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The benefits of registering a limited liability company in Delaware with Coddan Ltd: formally registering a limited liability company in the State of Delaware can be an intricate, drawn out LLC registration process. Coddan Ltd is well established in helping both EU and non-USA based customers in fully registering their LLCs in Delaware with minimal time, effort and cost involved. Also providing LLC post-formation support, Coddan offer guidance on who can form a limited liability company (LLC), information on tax, liability, business name registration and all associated tasks that come with registering an LLC within the State of Delaware.
Benefits of forming an LLC in Delaware: heavily experienced in registering UK, USA and incorporating offshore businesses, Coddan act as an invaluable tool already used by many LLCs nationwide. With countless forms, LLC formation in Delaware procedures and rules to consider, properly registering a business without any previous experience is an unnecessarily difficult task. Coddan is a market leader, with market leading low costs to match, streamlining the registration of a new LLC in Delaware online and complete the processes necessary on behalf of our customers.
To register an LLC in Delaware, a registered office address and registered expert in Delaware is a must. If you do not have this, or you are a non-U.S. resident, you will likely be unable to complete the LLC registration without of registered address in the State of Delaware. Coddan also offer a service providing a separate registered office address for non-USA customers, or similarly those wanting to maintain a separate trading address upon an LLC formation in Delaware. We cut out all the unnecessary red tape and LLC formations services, such as expensive solicitors, attorneys, and deal directly with the Secretary of State in Delaware to ensure limited liability companies are set up in the fastest possible time - often in a matter of hours - and with the minimum of fuss. Our online limited LLC formation application process, which is approved by Companies Registrar, means all clients have to do is fill in their details and submit it, and we do the rest.
Starting an LLC in Delaware: Coddan employ a team of LLC incorporation professionals who are trained to help and offer advice in relation to the many legal hurdles presented when registering a business in the USA. A rapid and effective business filing service, Coddan are able to register an LLP within as little time as 24 hours. After a consultation, customers are assigned their own LLC incorporation expert who will ensure each and every part of the registration is complete, as well as then handling the post-admin duties that come with running an LLC in Delaware. This type of support allows you to focus on the real business needs of your new LLC, without having to waste time on arduous admin tasks associated with registering a Delaware LLC.
Providing the correct information when registering your LLC company is of paramount importance, and mistakes can be costly and time consuming. Hiring a professional LLC incorporation service will eliminate this risk. For more information, contact the Coddan's dedicated support team. When your LLC company is formed, we will give you all the legal documentation from the authorities, including certificate of formation and our own tailor-made operating agreement (analog of the memorandum and articles of association). If you're unsure what kind of business you would like to establish in Delaware, our expert legal entities formation consultants are available to advise. Talk to us today and let us help you get your LLC company formed, at low costs and in no time. If you need an assistance with LLC company registration, you can also speak to our LLC incorporation advisors between 9.30am-6.00pm Monday to Friday by telephoning + 44 (0) 207.935.5171 or + 44 (0) 330.808.0089 (national rates).
LLC company registration in Delaware: anyone who is looking to register a new LLC in Delaware can do so within a few hours using one of Coddan's LLC formation packages. The process can be completed online and your certificate of formation and operating agreement will be posted out to you. If you start the process early enough in the day and the Seceretary of State is not completely swamped then a same day registration is perfectly possible. A range of LLC formation packages are available with additional options like extra documents, leather bound documentation or a nominee members (nominee directors). Please do get in touch if you would like to talk to one of our advisers about your incorporation requirements. We can register an LLC online, and provide notarisation and apostilled documents for our customers. If you need assistance with an LLC registration in Delaware, you can also speak to our business advisors between 9.30am-6.00pm Monday to Friday by telephoning + (0) 207.935.5171.
Delaware is the preferred location for incorporation, limited liability company formation, passive investment companies, business trusts, bankruptcy remote and special purpose entities, and common law trusts. Delaware's business friendly climate, favorable tax laws and legal precedent overseen by the Delaware Court of Chancery, all combine to make Delaware the jurisdiction of choice for many businesses.
To take advantage of this opportunity, Coddan provides LLC formation service online, registered expert and tegistered office address in the State of Delaware, and compliance services for all entity types. Our affiliates offer a full range of nexus services to maintain passive investment companies, along with independent nominee director/manager and trustee services for special purpose entities and business trusts. This makes us uniquely situated to provide all the LLC incorporation advantages of Delaware through an integrated network of professional providers.
Your LLC is considered organized once the original signed certificate of formation is delivered to the Delaware Department of State, and the articles are deemed to be compliance with state requirements. The document must be executed by one or more authorized persons, we, acting as your registered expert in Delaware will sign this document as an LLC incorporator in Delaware. Any person, including an attorney in fact, may sign the certificate of formation unless otherwise provided in the LLC company agreement (operating agreement).
Eligibility: an organizer may be a natural person, partnership (whether general or limited), trust, estate, association, corporation, custodian, nominee or any other individual or entity in its own or any representative capacity, in each case, whether domestic or foreign, and a limited liability company or foreign limited liability company.
If you consider using holding and operating companies in a multiple-entity business structure, the Delaware LLC formation statute provides for incomparable flexibility and simplicity in operating LLCs. It clearly allows for the establishment of different classes of interests, including voting and nonvoting interests.
It also allows a single LLC to house multiple separate entities. Thus, the holding entity and each operating entity can be formed within a single LLC. Each unit can have separate owners and its own classes of ownership interests. Each unit can own its own assets and incur its own liabilities. Each unit should have its own accounting system, which could simply consist of separate files within a single accounting system.
Importantly, the recordkeeping must be done as if each entity were organized as a separate LLC in Delaware. An LLC's daily business operations are conducted either by the LLC members themselves or by designated "managers" (who may also be LLC members).
An LLC member may also be a "manager" of a company, the LLC "operating agreement", a document separate and apart from the "articles of organization" controls the relations between managers and members should members be appointed. If no managers are appointed, then the LLC members, as a whole, must make and approve of all operational details of the LLC.
There are a few additional steps associated with setting up an LLC in Delaware - the remaining items in this section cover the legal formalities necessary to perfect the organization of your LLC in the State of Delaware. The first one we'll turn to is selecting an assumed or fictitious business name for your LLC. Many LLCs will operate under their formal LLC name - the name they put in their articles of organization.
For example, a computer repair shop files its articles under the name Fix Me LLC and also does business under that name. In that case, the LLC doesn't have to file its business name anywhere. But some LLC owners like to operate their LLC under a name that's different from the formal name of their LLC listed in their articles of organization. If you have questions please E-Mail or call us: 033 0808-0089 or +44 (0) 207.935.5171, fax: +44 207.504.3531.
Fortunately you'll usually have no problem operating your business under a different name than the one you used to organize your LLC in Delaware. To do this, most states simply require your LLC to file a "supposed" or "presumed" business name statement and pay a small fee (in legal slang this name is often called a "DBA" - short for "doing business as"). The purpose of this filing is to allow vendors, creditors and customers who encounter your fictitious name to track down the real owners of your business. You normally file this paperwork with the Secretary of State's office or the local county clerk's office. In some states, both a state and county filing are required.
Some states also require you to publish your intention to use a fictitious name in a local newspaper one or more times. Newspapers with legal notice classified sections will perform the required publications for you for a modest fee and will file an affidavit of publication with the state or local county clerk. Calling a local newspaper is generally the easiest way to discover whether your state requires the publication of a fictitious or assumed name statement and how to satisfy any related state requirements.
It's a good idea to document all important business decisions that require member or manager approval. Although LLCs are specifically empowered by many state statutes to conduct their affairs with less formality than corporations, it is nevertheless wise to document and record your major business decisions. In a worst-case scenario, if an LLC keeps few or no records, a court might disregard the LLC's legal existence and hold its members personally liable for business debts.
This is more likely to occur if the LLC is used as a device to defraud others or treat them very unfairly.) But an even more important reason to document key LLC decisions is to plan ahead to reduce the possibility of controversy and dissension among LLC members. Believe me, even in the ranks of a small LLC where all of the members are friends, this is likely to occur if key decisions are not recorded. Lastly, formally documenting key LLC actions is a good way to keep any members who are not involved in the day-today management of your LLC fully informed of major LLC decisions.
Many of these decisions are made at LLC meetings - either an annual meeting (if you provide for one) or a special meeting called by the members during the year. After each meeting, minutes that state the business discussed and approved at the meeting should be prepared in plain English, not legalese. Then a copy of the minutes should be placed, together with any notices of the meeting and documents or reports presented at the meeting, in the LLC records binder.
Many one- and two-person LLCs will not want to hold a meeting every time they have to make a major LLC decision. No question, holding a meeting with yourself is a bit silly. But even when meetings aren't helpful, it makes sense to keep good records of important decisions. That's why most states specifically allow LLC members to record important decisions on what are called consent forms - the member or members simply write down the important decision and sign at the bottom to show their consent.
Most states require an LLC to file a short annual report form with the same state filing office where your articles of organization were filed - typically the Secretary or Department of State's office, in the state capital.
Annual report forms are printed and supplied by the LLC filing office and are mailed out to LLCs annually. These forms typically require basic biographical information, such as the names and addresses of current LLC members and/or managers and the name and address of the LLC's registered expert and office for service of legal process. In some states, you can leave items blank if there is no change in the information from the previous annual report filing.
Your LLC will need to obtain a federal employer identification number (FEIN) using IRS Form SS-4 and to register as an employer in your state. For salaried workers, your LLC must withhold, report and pay: federal and, if applicable, state income taxes, federal employment taxes (unemployment, Social Security and Medicare taxes), and state payroll taxes (state unemployment, disability and workers' compensation insurance).
A limited liability company is one of the more recent and most flexible business structures available in Delaware. Formed by filing a certificate of formation with the Delaware Secretary of State, a limited liability company is a separate legal entity having the power to conduct business, acquire, hold and dispose of property, and sue or be sued in its own name. A limited liability company in Delaware may have only one member.
The LLC management may be by the members or by selected managers who may or may not be members themselves. As with limited partnerships, the relation among members and the management structure are typically set forth in a written limited liability company operating agreement.
A limited liability company agreement may provide for various classes of members and managers and their respective rights, powers and duties and it may also set forth the manner of allocation of profits and losses of a limited liability company to its members. Principal attributes of a limited liability company include: (i) any member or manager may bind a limited liability company, (ii) except in certain limited situations, no member or manager is personally liable for the debts or obligations of a limited liability company, and (iii) perpetual existence. The foregoing may be changed by express provision in the limited liability company agreement.
We have considerable experience with the process of forming LLC's, and with Delaware requirements in particular. As a result of our significant involvement with Delaware LLC formations, we can help make your business a quickly, efficiently, and at a very fair price. All you need to do is provide us with the basic information about your company, confirm its accuracy, and our "wizard" will do the rest - incorporating all of your information directly into a Delaware certificate of LLC formation and an operating agreement that will cover all of your essential company information including ownership, profit and loss allocation, and the management of your business.
Once you have printed the documents, all that is left to do is sign and file them according to the directions that we provide for you. We can assist with the provision or location of an independent nominee member to work with your company to meet due diligence and other LLC governance needs.
As society grows more complex, demands on business expand. State and federal laws and regulations affecting business multiply, giving rise to ever increasing risks of liability and loss unrelated to the economic performance of a business. The legal form in which a business operates has become more crucial than ever.
The choice of entity has itself grown more complex. Principal choices now include: sole proprietorship; general partnership; limited liability partnership; limited partnership; limited liability limited partnership; limited liability company; business trust; stock corporation; membership corporation; subchapter S corporation; close corporation; and professional corporation. Each has its advantages and disadvantages. Each is designed to address certain business problems.
Whether starting a new business, expanding an existing business, or pursuing a strategic alliance or joint venture, selection of the proper form in which to conduct business can contribute significantly to achieving the goals of the enterprise.
It can also minimize conflict among participants and reduce or eliminate risk of personal liability. An informed choice of entity is a part of prudent business planning. To assist such planning, in the following pages we briefly describe the principal forms of business entities. These descriptions are not a substitute, of course, for consultation with your business advisers.
Rather, they are intended to provide information that will assist you in working with your business advisers to select the type of entity that best meets your needs. The limited liability company (LLC) is a legal entity separate and distinct from the personal affairs and other business involvements of its owners (called "members"). A LLC has some characteristics similar to those of a limited partnership, some corporation like characteristics, and still other characteristics unique to the LLC form of business organization.
Forming a limited liability company in Delaware is accomplished by a central filing of articles of organization with the appropriate state agency. Once the filing takes place, the LLC springs into existence and very little maintenance filing is needed later.
The steps necessary to file the articles of organization and create an LLC are quite simple. Of course, the most important part of the process is to include the proper information in the articles of organization. As a separate legal entity, LLC finances and records are established and maintained independently of the members' personal financial arrangements and other business involvements.
As is typical of similar legal entities, this separation of finances and records makes it easier to prepare reliable financial analyses of the business unit. If you are considering organizing a LLC that will own and operate part or all of your business activities, you should secure both legal and tax advice specific to your circumstances, the outcomes you want to attain, and the actions you are considering. Do not make decisions without receiving skilled professional advice.
We specialize in fast; attorney managed low-cost Delaware incorporation of profit or non-profit companies, limited liability companies, limited liability partnership and limited partnership, registered expert professional services. Coddan can help you with an LLC formation services in Delaware or most other common legal procedures without the expense of an attorney.
In most states, an LLC's articles of organization (certificate of formation) must be filed with the Secretary of State. Often, a separate corporate division exits within the Secretary of State that handles LLC filings. When the articles of organization are ready to be filed, go to the necessary office with your completed articles of organization, hand them to the clerk and ask that they be filed. Some states require copies to be filed along with the original. It is a good idea to ask for a file-stamped copy for your records.
Over 50% of all companies on the NY Stock Exchange are Delaware corporations. Delaware has a long heritage as a business-friendly state and may be a good choice if you intend to take your company public and offer publicly traded stock. Delaware has many other incorporation advantages, including low incorporation fees, low annual franchise taxes, and no state corporate income tax for corporations that operate outside of Delaware. Furthermore, Delaware maintains a separate court system for business, called the "Court of Chancery". This Court is known for its well-established record of decisions and speed at which it handles disputes. So instead of spending your valuable time in court, you can spend it running your business.
Be aware, however, that if you incorporate an LLC in Delaware while your business is located outside of Delaware, you may need to qualify to do business in your home jurisdiction. This may require an extra step and an additional fee to your home state. Coddan can assist you with incorporating or forming your LLC in Delaware and qualifying that corporation or LLC in any state you choose.
Many companies conduct business throughout the US and abroad. A company having business locations in multiple states will typically incorporate or form an LLC in a single state, then "qualify to do business" in the other states. This means they formally register in these other states, paying additional franchise taxes and filing annual reports, as required. We can assist you in qualifying your corporation or LLC in any state you choose.
Every State LLC law requires that you identify your business as an LLC in the firm name. Use abbreviations like L.L.C., LLC, LC or the phrase "Limited Liability Company" after the firm name. Whatever LLC identifier you choose, you must include it whenever and wherever you use your firm name. The LLC identifier must be on items such as signs, stationery and advertising material. Identify your business as an LLC to provide notice of your business' status to all persons who deal, or may deal, with your business. Presumably, such persons then know that recourse against LLC members is limited.
In some states, if you do not properly identify your LLC, managers and members may become liable for damages caused by the failure to properly identify the LLC. Some states require LLCs to get name approval and register the LLC name. If that is the case in your state of formation, you may be able to obtain forms for name registration purposes from the secretary of state. You may not use an LLC name that is deceptively similar to another business's name. However, in some states you may use an LLC name that is similar to the name of another business if you get the consent of that business.
Typically, the filing of articles of organization and payment of a filing fee is enough to form an LLC. In some states, however, more is required. Usually, the clerk at the secretary of state's office in the state of formation informs you of any additional requirements. Nevertheless, do not rely on the clerk's advice. Find out about additional filing requirements on your own. Hire a lawyer or review your state's LLC law.
The additional filing requirements are many and varied. For example, in New Hampshire, a form must be filed stating that membership interests are either exempt from the securities regulation laws or have been registered in compliance with those laws. In Georgia, those who form LLCs must file a transmittal information form and name reservation certificate. In Arizona, a domestic LLC must publish three consecutive notices of filing within 60 days in a newspaper of general circulation in the county of the LLC's known place of business.
The basics of the membership: typically, the filing of articles of organization and payment of a filing fee is enough to form a limited liability company (LLC) is usually as simple as filing the articles of organization with the secretary of state and entering into an operating agreement with the other members of the LLC. There are two ways to acquire an LLC membership interest. The first way is for the member to be part of the formation of the LLC and enter into the operating agreement with the other member or members. The second way is through the transfer of an LLC membership interest from an existing member to a non-member. When deciding whether to become an LLC member, find out what goes along with being a member.
What do LLC members get? The foundation of the LLC is freedom of contract. Within certain limits, the members may agree to the relative rights, duties, responsibilities and contributions of each member. As a result, LLC members have the flexibility to hold membership interests into countless types of creatures that serve the individual purposes of their creators.
For some LLC members, this means a membership interest providing for maximum control, participation and contribution. For others, it means a membership interest with minimum control, participation and contribution. Countless varieties of membership interests exist between these two extremes. Therefore, if you are asking yourself, "What do I get with my LLC membership interest?" perhaps you should instead ask yourself, "What do I want from my LLC membership interest?"
Who may be an LLC member? LLC members may typically be individuals, corporations, partnerships or other entities, such as business trusts. As a result, business firms may be able to join forces in creative ways that previously were impractical because of tax, liability and flexibility concerns.
The nature of an LLC membership interest: a membership interest in an LLC is personal property. The value of the personal property making up the LLC membership interest is determined by examining the economic rights that accompany the interest. It is generally said that an LLC membership interest consists of the LLC member's share of the LLC's profits and losses, together with the right to receive a distribution of the LLC's assets.
This formula for calculating the personal property value of an LLC membership interest is borrowed from partnership law. As personal property, the economic portion of an LLC membership interest is freely transferable and may be reached by creditors. Of course, LLC members have other rights, such as voting rights and the right to manage the LLC. But these non-economic rights are not considered part of the membership interest. Furthermore, the non-economic rights are not freely transferable by the member. The lack of free transferability of non-economic LLC member rights is one of the features that enable LLCs to attain partnership tax status.
Adding new members: the LLC may increase its membership by adding members. There are basically three ways to provide for the admission of new members, depending on which state's statute is involved. Some states allow LLCs to add new members if the Articles of Organization (Certificate of Formation) so provide. Other states allow LLCs to add new members upon their compliance with the operating agreement or, if the operating agreement is silent on additional members, upon the consent of the members.
The third category contains states with LLC laws that do not address the terms under which additional members may be added. In these states, it is likely that additional members may be added upon the unanimous consent of the members. Sometimes members of an LLC do not want additional members to be added.
Legal authority of LLC members and managers: any member of a member-managed LLC, or any manager of a manager-managed LLC can legally bind the LLC to a contract or business transaction. In other words, each member in a member-managed LLC and each manager in a manager-managed LLC acts as an expert of the LLC, and can single-handedly commit the entire LLC to a contract or business deal. This is the same legal authority given each partner in a general partnership.
However, there are some exceptions to the legal authority of LLC members and managers. An LLC usually can't be held to a contract or deal if it was clearly outside the normal course of business of the LLC, or if the outsider contracting with the member or manager knew that the LLC member or manager did not have specific authority to conduct that transaction. For example, if a member of an LLC that operates a small local fish store tries to commit the LLC to purchasing a TV station, the sellers would be well advised to be sure that member really had authority to do the deal.
If they didn't check up and a court fight followed, a judge would probably find that because TV stations and fish stores are completely unrelated, the ambitious LLC member had no legal authority to bind the LLC. In that case, the member might be held personally to the contract, but the LLC would not be bound to carry it out. Unfortunately, when it comes to trying to disavow the actions of rogue LLC members or managers in more moderate situations, this lack of authority can be hard to prove.
The moral should be clear. Local fish markets trying to buy TV stations aside, it's always safest to assume that your LLC will be legally bound by any contract or transaction signed or entered into on behalf of your LLC by any member or manager, no matter how unreasonable the deal is. This broad legal authority should not present a problem if you make sure you choose the right people to be members or managers of your LLC in the first place.
But it can be poison if you work with the wrong people. If you're uncomfortable with the idea that a particular co-owner could obligate your entire business, you shouldn't go into business with that person. And it follows that, if you don't like the fact that any co-owner can bind your business to any deal, a multi-owner LLC is probably not the right type of business for you. Instead, you may want to form a one-owner LLC, where you have the only say.
Transferring membership in a limited liability company: a limited liability company (LLC) member's economic interest may be transferred by assignment. A transfer of an LLC member's economic interest does not transfer the right to manage and participate in the LLC. Usually, the member who receives the transferred LLC interest attains non-economic rights, such as management and participation, only with the agreement of the non-transferring members. The certificate of formation and operating agreement often dictate the terms under which non-economic membership interests are acquired. The best course is to specifically address membership transfer terms in the operating agreement.
This way, there will be no confusion over the rights of new members. When the non-transferring members do not agree to allow the assignee of the economic membership interest to attain non-economic rights, the assignee simply stands in the shoes of the transferor. That is, the assignee receives distributions from the LLC in the same manner as the original member who assigned the economic membership interest.
This type of ownership arrangement is not necessarily bad. Indeed, some assignees of LLC membership interests may prefer to own only the economic portion of the LLC membership interest. When the non-transferring members do agree to allow the assignee of the economic membership interest to attain non-economic rights, the assignee not only gains the right to manage and control the LLC, but also becomes liable for the transferor's obligations.
The transferor remains liable for his or her obligations as well. However, the non-transferring members and creditors may release the transferor from the obligations. In some states, LLCs have the option of placing the admission of new members in the hands of the LLC managers. This method may be beneficial for large LLCs that anticipate potential problems if all or most members must consent to membership interest transfers.
If membership transfer decisions are to be placed in the hands of the managers, the LLC Certificate of Formation and operating agreement should specifically address the issue and spell out in detail the manner in which the transfer decisions will be made. It may be possible for the members to agree in advance those certain persons or entities are immediately entitled to full membership rights upon transfer of an LLC interest to them.
In other words, the non-transferring members do not have the power to prevent the new member from attaining full membership rights. This type of advance agreement may be especially useful for family-owned LLCs in which the principal owner of the business wants to ensure that later family members are not locked out of the management of the business.
You want to make sure you maintain the distinction between yourself and your business - not always easy in a small business - but it is an important distinction if you want to limit your personal liability.
You and your business are not the same. In the eyes of the law, you are an expert of the LLC. For example, when you sign contracts and other documents, you're signing them (or should be signing them) on behalf of the LLC and not as an individual. Remembering this distinction between you and your LLC can seem especially burdensome if you've done business in the past as a sole proprietorship or partnership and have just changed over to an LLC.
On the day-to-day level, it's really business as usual and, in many respects, nothing at all has changed. Yet, if you want to get the maximum protection from personal liability for debts of the business, you need to carefully observe the legal distinction between yourself and your LLC. Fortunately, as you'll see shortly, that task isn't as tough as you may think. The reason why it's so important to always treat the LLC as a separate entity is that if you don't, a judge may decide that you're personally liable for a business debt or that you have to pay a lawsuit judgment out of your personal assets.
We are not aware of any reported cases in which a judge has held an LLC member liable for a debt of the business, but it's almost sure to happen soon, as there are literally thousands of court decisions in which owners who have not respected corporate formalities have been held personally liable for debts of their corporation. It's highly likely that judges will apply these same legal principles to an LLC owner who ignores the fact that her business is organized as an LLC, but operates it more like a sole proprietorship or partnership. It follows that many of the precautions that we recommend for protecting corporate shareholders from personal liability should help to shield LLC members.
Put adequate capital into your LLC. Put enough money and other assets into your business to meet business expenses that are likely to come up. If you don't, and there's a lawsuit, a judge may rule that the LLC is a sham that it really isn't a separate entity from its owners in which case you and the other members may be personally liable. Each business has different financial needs. You can often legally fund a small home-based business such as a computer consulting operation on a shoestring. But opening a pizza restaurant would require considerably more money, since you'd need to lease space, outfit a kitchen and dining area and hire employees. Your accountant should be able to recommend a reasonable level of funding for your LLC.
Insure against obvious risks. Think carefully about whether there's a substantial risk of customers or others getting hurt because of your business. If so, it's a good idea to buy a reasonable amount of liability insurance coverage. In a few cases, judges have felt that the owners of a small corporation were acting recklessly because the corporation didn't buy liability insurance that was reasonably available. This recklessness played a part in the judges' decisions to hold the owners personally liable to people injured by the corporations' employees or products. It's likely the same principle will be applied to LLCs. So if liability insurance is available at a reasonable price, see to it that your LLC gets the proper coverage.
Separate your personal finances from your LLC's finances. The LLC needs its own bank account. Don't use that account to pay your personal expenses. If you receive checks from the LLC for salaries or draws, deposit the checks in your personal account and then pay your personal bills from that account. If you use personal funds to pay business expenses for example, you pick up a business book on the way home from work you can have the LLC reimburse you. Be sure the LLC keeps a receipt for your purchase of the book to justify deducting the cost as a proper business expense. To further separate you and other members from the LLC, document all transactions as if you were strangers. If the LLC leases a building from you, sign a lease. If the LLC borrows money from you, get a promissory note. If you sell equipment to the LLC, sign a bill of sale to formally transfer legal ownership to the LLC.
Use the official LLC name. Suppose the name of your LLC is Alpha & Betta LLC. Use that full business name in all your business dealing on your stationery, business cards and phone book listings, on your signs, in catalogs and on the Internet. Don't use a different name or abbreviation (such as Alpha & Betta, without the letters LLC) unless you file an assumed name certificate or fictitious name certificate as permitted by state law.
Sign documents as an LLC member or manager. In correspondence and on checks, sign your name as John Doe, Member, or John Doe, Manager, along with the full name of your LLC, rather than just John Doe. This makes it clear to those who deal with you that you're acting as an expert or employee of the LLC and not as an individual. Follow this practice on any other documents you sign, such as contracts, order forms and promissory notes.
Assign existing business contracts to your LLC. If you've been doing business as a sole proprietorship or partnership and are now switching over to an LLC, you may have some ongoing contracts that you'd like the LLC to take over. For example, maybe your sole proprietorship signed a five-year lease for business space and there are still two years left to go under the lease. Or maybe the partnership you established for your lawn maintenance business has several contracts in force to service the lawns of major businesses in a local research park. It makes sense to transfer these contracts to your LLC.
You usually can do this without getting the consent of the other party to the contract, unless the contract specifically prohibits an assignment. But be aware that if you do assign a contract to your LLC, you'll still be personally liable for complying with it. There are basically only two situations in which this isn't true. The first is when the other party consents in writing to release you from liability. The second is when the contract contains language allowing you to assign it to a new LLC or corporation and be free from personal liability. Unless you fall into one of these two exceptions, the landlord in the first example will be able to turn to you for the rent if the LLC doesn't pay it.
Or in the second example, the businesses that contracted for your lawn maintenance services will be able to hold you personally responsible if your LLC doesn't perform and the businesses have to pay a higher price to get the work done by someone else.
Record keeping. If someone goes to court and asks the judge to disregard your LLC and hold you personally liable, you may be able to bolster your position if you can produce a record book that shows you've consistently treated the LLC as a separate legal entity. This is clearly the case when someone seeks to get behind a corporation and hold the owners (shareholders) personally liable. That's because by law and tradition, corporations are expected to observe a number of formalities such as holding annual meetings and documenting meetings of the board of directors.
The paperwork requirements for an LLC are minimal compared with those for a corporation. Still, you may want to hold periodic meetings and document important LLC decisions especially if you have more than two or three members.
Depending on the degree of formality you choose for running your LLC, we recommend that you keep an LLC record book containing important paperwork, such as: The Certificate of Formation. The Operating Agreement. A membership register listing the names and addresses of your members. A membership transfer ledger showing the dates of any transfers of membership interests by a member. Membership certificates and stubs (if your LLC decides to issue certificates to members); and Minutes of LLC meetings and written consent forms.
Even if your LLC has decided to proceed with a minimum amount of formal paperwork, you should consider documenting the members' approval of the most significant LLC actions, including: authorizing LLC bank accounts and designating who's eligible to sign checks and withdraw funds. Borrowing money, from a bank or from an LLC member. Amending the articles of organization or the operating agreement. Buying, selling or leasing real estate. Electing corporate style taxation or a tax year other than a calendar year. Authorizing distributions of profits to members. Admitting new members. Authorizing the LLC purchase of the interest of a departing member.
By staying on top of this simple paperwork, you'll have a paper trail of important LLC decisions that will help satisfy courts, the IRS and others that you've attended to the necessary legal and tax niceties and that you've treated the LLC as a separate legal entity.
When an LLC needs money, it typically applies to a bank for a loan or asks its members for additional funds, in the form of additional capital contributions or as loans. Some smaller LLCs may prefer to borrow funds from members, since they are usually active in the business and willing to help out when cash flow is tight. (If your LLC wishes to lend money to - rather than borrow from - an LLC member, manager, officer, or employee.)
This chapter discusses the tax and legal ins and outs of borrowing money. We provide resolutions that allow the LLC to formally approve finalized LLC loans taken out from financial institutions, existing members, or their family and friends. Setting out this type of specific borrowing approval in a formal resolution helps an LLC control the borrowing behavior of its principals. It also helps everyone in the LLC agree on how much to borrow when cash is short.
Many LLCs borrow funds from time to time from banks and other commercial institutions such as savings and loans and credit unions. In this chapter, we generally refer to all of these institutions as "banks." There are two common ways LLCs borrow from banks:
Lump-sum loan. The LLC receives the entire amount of borrowed funds all at once and repays it over time, usually over two to five years. Banks often charge the prime interest rate currently in effect plus two or three percentage points or an adjustable rate that changes in step with a particular financial index. Especially at the start of its relationship with a bank, your LLC should also expect to be asked to pay a point or two as a loan fee and to pledge either the personal assets of LLC principals, the LLC's accounts receivable, or the LLC's inventory as collateral for the loan.
As your LLC's credit history develops with the bank, you should be able to negotiate lower points on future loans and might get away without a pledge of personal collateral. (This is a good thing, of course, because when an LLC member pledges personal assets for a loan, he or she gives up the limited liability protection that otherwise applies to LLC debts and is personally liable for the loan if the LLC fails to repay it.)
Revolving line of credit. Funds may be borrowed by the LLC, paid back, and reborrowed over a period of time (usually one year) on an asneeded basis, up to the LLC credit limit. Interest rates and fees are similar to those for a loan, but for the credit limit to be renewed for another year, the bank may require that the line of credit be paid off at least for part of the year. "Out of debt for thirty days once in each 12 months" is a typical requirement for renewal. As with lump-sum loans, your LLC may be required to pledge either the personal assets of LLC principals, the LLC's accounts receivable, or the LLC's inventory as collateral for the line of credit.
Tax effects of a bank loan to an LLC. The money an LLC borrows from the bank (also called the principal of the loan) is not considered income. Therefore, it is not allocated to members and taxed to them. After all, the principal amount of a loan must be repaid - the LLC and its members don't really get to keep this money. The interest that the LLC pays on a bank loan can be deducted from the LLC's income as an LLC business expense. This reduces the LLC's net profits, which are allocated and taxed to members at the end of the LLC's tax year.
A bank loan to an LLC can also affect the members' tax basis in their membership interests. This is a complicated area, so we'll just scratch the surface.
Generally, your income tax basis in an ownership interest is the cash amount you pay, along with your current basis in any property you transfer, to buy the interest. If you transfer property that's subject to a debt that the business assumes - for example, you transfer real estate subject to a mortgage - your basis in your interest is decreased by the amount of the assumed debt. An increase in basis generally results in lower capital gains taxes when an LLC member sells his or her interest; likewise, a decrease in basis generally results in higher taxes. In addition, members sometimes want to increase their basis in a membership interest so they can deduct losses of the LLC on their individual income tax returns.
Here's how it works: members generally get to deduct LLC losses allocated to them, up to the amount of their basis in their interest. If the loss exceeds the basis amount, the loss cannot be deducted on the member's tax return for that tax year but must be held by the member for deduction in future years. A member's basis can be affected when a member personally guarantees repayment of a bank loan - that is, when the member agrees to pay off the loan balance if the LLC defaults and the LLC assets pledged as collateral don't cover it.
The tax rules classify this type of loan as a "recourse debt," because the lender has recourse to seek repayment from the member who made a personal guarantee. When a member takes on a "recourse debt," the tax rules allow that member to increase his or her basis in a membership interest by the full amount of the loan. Of course, any time a member's basis increases because of an LLC loan, the member's basis decreases as the loan is paid off.
There are other ways that a member's basis in a membership interest can be increased when the LLC takes out a loan. Bank loans can sometimes be classified as recourse debt of the members, even if they don't personally guarantee the loans. For example, if the bank that has loaned money to the LLC can force the members to pay cash into the LLC to bring their capital account balances back up to zero any time they are negative, the bank loan can be classified as recourse debt. In this situation, a member's basis is increased by multiplying the total loan amount by the member's percentage of profits interest in the LLC.